CFIUS – Increased Restrictions on Foreign Investments

Written by: Mina Zhan

CFIUS stands for the Committee on Foreign Investment in the United States. It is a federal interagency committee chaired by the U.S. Treasury Department that is authorized to review any transactions that may result in foreign control of a U.S. company. Its purpose is to assist the President in overseeing the national security aspects of direct foreign investment in the U.S. market.  The committee may review any transaction in which a U.S. company proposes to participate; or a company involved in an acquisition, at its option, may voluntarily inform CFIUS so it may initiate a review. Most noticeable are those instances in which CFIUS reviews proposed foreign investment in U.S. companies. For example, on March 13, 2018, CFIUS blocked the Singapore-based company Broadcom’s $117 billion cash-and-shares hostile bid to take over its U.S. rival Qualcomm. CFIUS stopped the takeover, as it considered the bid a potential national security risk. It believed that Broadcom would discontinue financing any additional research on Qualcomm’s part regarding “5G” technology development, thereby giving its Chinese rivals a significant advantage over U.S. businesses.

According to CFIUS’s annual reports, the number of cases reviewed by CFIUS has increased from 65 in 2009 to nearly 250 in 2017. Predictably, with the August 2018 passage of the Foreign Investment Risk Review Modernization Act (“FIRRMA”) and the Export Control Reform Act (“ECRA”),  followed by the Pilot Program which went into effect on November 10^th as part of the FIRRMA, foreign investors in U.S. high technology industries are facing heightened scrutiny from CFIUS moving forward.

FIRRMA

Prior to the enactment of FIRRMA, CFIUS was only authorized to review the national security implications of transactions that could result in control of a U.S. business by a foreign person. FIRRMA expanded CFIUS’s authority to review in multiple ways. To start with, it extends CFIUS’s review. Originally, CFIUS had 30 days to review, with a potential subsequent 45-day extension after filing of the voluntary notice. Under FIRRMA, CFIUS will have a 45-day review period, following by a subsequent 45-day investigation period which can also be further extended for 15 days. In other words, the longest evaluation time in theory was extended from 75 days originally to 105 days. In addition, FIRRMA expanded the scope of transactions subject to CFIUS’s review to include certain foreign investments in U.S. businesses that do not result in foreign controlling interests. New categories of transactions which will be covered by CFIUS’s review include certain real estate and bankruptcy transactions, as well as transactions involving sensitive personal data of U.S. citizens, and changes in a foreign investors’ governance rights. The scope of potentially sensitive investment fields is also enlarged beyond traditional national security and critical infrastructure to include other “critical technologies” such as nanotechnology, biotechnology, and emerging and foundational technologies.

THE PILOT PROGRAM

The Pilot Program is temporary and an important step in FIRRMA’s enactment. It commenced on November 10, 2018 and will end no later than the date on which the full regulations implementing FIRRMA become effective (latest date would be March 5, 2020.) The Pilot Program expands CFIUS’ jurisdiction to cover a range of additional transactions involving foreign acquisition of equity interests in U.S. businesses that (1) produce, design, test, manufacture, fabricate or develop “critical technologies” that are then (2) used or designed for use in certain sensitive industries identified in the rule. Importantly, the Pilot Program also makes it mandatory for parties to submit a declaration with CFIUS when their investment in a pilot program U.S. business is either (1) a “pilot program covered investment” (i.e., one that is sufficient to trigger the expansion of CFIUS’ expanded jurisdiction under the regulation) or (2) could result in foreign control of a pilot program U.S. business (i.e., the traditional CFIUS jurisdictional test).

The mandatory nature of these filings is a marked change for CFIUS. Previously, a business voluntarily could notify CFIUS to seek either its approval or its confirmation that the transaction was not subject to CFIUS’ jurisdiction. This type of notice effectively would be the only way to receive an advanced legal guarantee that the U.S. President would not unwind a transaction post-closing. Under the new Pilot Program, it became mandatory to submit a declaration with CFIUS to declare information including structure of transaction, total value and sources of financing, etc. This  declaration[1] must be filed at least 45 days prior to a transaction’s expected completion date. Within 30 days of accepting a declaration, CFIUS may do one of the following: (1) request a written notice from the parties (the acceptance of which would start CFIUS’ 45-day review process) requiring more detailed information (considering this possibility, some businesses may want to submit a written notice upfront), (2) unilaterally take action to review the transaction, or (3) conclude its action with respect to the transaction. As CFIUS develops its new procedures and requirements, businesses and investors would be well-served to keep a close eye on these developments.

[1] A template can be found on here